3 Reasons ADSK is Risky and 1 Stock to Buy Instead

Autodesk’s 20.7% return over the past six months has outpaced the S&P 500 by 5.2%, and its stock price has climbed to $324.98 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Autodesk, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Autodesk Not Exciting?

We’re glad investors have benefited from the price increase, but we're swiping left on Autodesk for now. Here are three reasons there are better opportunities than ADSK and a stock we'd rather own.

1. Weak ARR Points to Soft Demand

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Autodesk’s ARR came in at $6.67 billion in Q2, and over the last four quarters, its year-on-year growth averaged 14%. This performance slightly lagged the sector and suggests that increasing competition is causing challenges in securing longer-term commitments.

2. Long Payback Periods Delay Returns

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Autodesk’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a highly competitive environment where there is little differentiation between Autodesk’s products and its peers.

3. Shrinking Operating Margin

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Analyzing the trend in its profitability, Autodesk’s operating margin decreased by 1.2 percentage points over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 21%.

Final Judgment

Autodesk’s business quality ultimately falls short of our standards. With its shares outperforming the market lately, the stock trades at 9.4× forward price-to-sales (or $324.98 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. Let us point you toward our favorite semiconductor picks and shovels play.

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